A no-doc loan is an industry term meaning no requirement for income verification, like a W-2 or a tax return. Most real estate investors are self-employed earning a living from the monthly rental income generated from the property and the proceeds from the ultimate sale.
There is no third-party verification of income. Even though the total income may be more than the average W-2 employee, this income cannot be verified over consecutive periods and, therefore, the borrower is deemed risky.
This type of borrower will not meet the standards of the Consumer Financial Protection Bureau (the “CFPB”). The CFPB requires a traditional lender to make a reasonable determination that a borrower can repay the loan, and this will not happen without third-party income verification.
A no-doc loan is designed for those borrowers who are self-employed. A real estate investor is a potential borrower under a no-doc loan if the sole source of income is derived from the operations and the sale of real property.
To offset the non-verifiable income condition, a potential borrower needs a higher credit score than a borrower under a conventional loan program. The industry standard is 700 or higher.
The process of closing a no-doc loan is similar to that of a conventional loan, the main difference being the due diligence documentation required for underwriting and evaluating the merits of the transaction and of the borrower.
Difference Between a No-Doc Loan and a Qualified Mortgage Loan
A qualified mortgage loan is processed through a bank or another type of regulated financial institution. This is the reason for the application of the CFPB standards. Generally, qualified mortgage loans are designed for W-2 wage earners purchasing an owner-occupied property.
The lenders sponsoring a no-doc loan are private, hard money lenders and do not fall under the requirements of the CFPB. These lenders are not regulated. The no-doc loan programs are designed for real estate investors.
What a Real Estate Investor Should Know
This writing does not mean to insinuate that there are no conventional loan programs available to investors. There are such programs, but, generally speaking, the investor needs a long relationship with the bank and must have a certain amount of liquid cash on deposit.
The regulated lender will lend up to a 65%-70% value ratio and often with personal guarantees. There may be requirements that other assets be cross-collateralized and other obligations cross-defaulted to further secure the loan. If an investor is comfortable with these terms, then the investor will enjoy a lower interest rate.
The private, hard money lender underwriting and providing the no-doc loan will lend up to 85% of the capital stack. Depending upon the strength of the borrower, there may be no personal guarantees required other than the typical “bad boy” clauses. The interest rate for a no-doc loan will be higher than a conventional loan.
When a lender lends higher into the capital stack, this translates to a lower equity requirement upon the borrower.
The Benefits to Investors
Private lenders, like hard money lenders offering no-doc loans, provide faster service for both approval and closing for more types of investment opportunities. A hard money lender in Los Angeles knows that every situation and opportunity is different. A private lender will lend a more opportunistic and entrepreneurial view to its underwriting than a traditional, regulated lender. After evaluating the merits of the deal, a hard money lender will then evaluate the credit history, the investing experience, and the liquid assets of the borrower.
In summary, the benefits to a real estate investor borrowing from a hard money lender in Los Angeles are subjective underwriting standards and shorter closing periods without verification of income.
If you are interested in purchasing real estate or need funding for your next project, you need to work with a reputable and respected hard money lender in Los Angeles. PB Financial Group is a premier direct hard money and bridge lender who has been providing quick funding since 2006, and who has funded over 2,700 hard money/private money loans. Our objective is to work to satisfy your financing needs on important real estate projects throughout California in an efficient manner.
To learn more about how to successfully finance your next real estate venture, please contact PB Financial Group at 877.700.3707 to schedule a consultation or visit www.CalHardMoney.com to learn more.
PB Financial NMLS #357614/DRE #01522495